Two Questions Answered

Market Outlook: Expecting Higher Volatility
Market Indexes: Major U.S. Equity Indexes were mixed
SPX Candle: Lower High, Lower Low, Lower Close - Trend Candle
FED Posture: Quantitative Tightening (QT)

Well, two of our three questions from yesterday were answered. As a reminder, those questions were:

1. Does the potential diagonal above finish lower in good order?
2. Does the Dow make a new daily low tomorrow?
3. When the retrace begins, does it stop short of the high or make a new high?

First, the diagonal did not finish in good order on the Dow and the S&P. The overnight futures and intraday range was volatile, and made a different pattern. But, the Dow did make a new low today, as expected, and near the last half-hour, the S&P500 did too. (So, too did the NQ futures).

The market, as measured by the S&P500 Index closed yesterday at 2,826. The futures were much higher overnight, then turned lower, and cash opened down -4 points at 2,822 and  continued lower to 2,815 before a rally began which reflected where the overnight futures had traveled. Prices traveled up to 2,835 (a +20 point) swing, and then headed lower to 2,816, then higher to 2,826, and then lower to make the new low at 2,812 before rebounding +10 points into the close at 2,822.

Here is the same chart from yesterday, relabeled to show it's construction as a running triangle. The new low at the end of the day can do one of two things: it can validate and complete the running triangle (i.e. done, finito!) or there is an alternate shown on the chart, as well.

S&P500 Cash - 15 Minute - Running Triangle

So there are actually four options - depending on the outcome of the employment report. The first option is that wave v? extends significantly lower - say to the width of the triangle from the breakdown point - and completes a larger five-wave impulse downward. The second option is that with only a minor new low, that yet another minor new low forms and creates an ending contracting diagonal in some manner. A third option is that a longer triangle in time forms as a barrier triangle. That is that wave (d) moves to the right. And the fourth option as I mentioned was that the pattern is currently done and complete.

In any event, it looks like we are going to have five-waves down.  But, do you see why I coined the term, The Fourth Wave Conundrum? Such wave action keeps Elliott analysts guessing through no fault of their own. It results from the numerous fourth wave structures that can form which are largely unpredictable. Even the blue  EMA-34 meanders through the pattern with significant waves on either side for form and balance.

Next I'm going to show you the current count of the Russell 2000 Futures in order to help answer the last question. How deep will any retrace be?

Russell 2000 - Cash Index - Daily

This count show the running wave iv version of the triangle in the center. It also shows that within a potential wave v up, that wave (iv) narrowly averted invalidation by not overlapping the prior wave (i), but then handily reversed by the end of the day. So, this chart - of 2000 stocks - suggests that a fifth wave up is entirely possible even as bad a momentum is.

Will a fifth wave up in this index make a new high? Possible. There is still a gap at the top of the S&P500 chart which could fill. Or, will there be five waves up that truncates? It is impossible to say, but it should be clear from today's whippy action that volatility is higher, and risk of calling a wave incorrectly is up too.

Again, these are some of the more difficult counts because the wave lengths within this potential fourth wave have been so long.

Have a very good start to your evening.
TraderJoe